While there’s been significant progress unifying payment systems across the EU, substantial fragmentation still exists. For example, national payment card schemes in 10 EU countries aren’t compatible with other EU countries and mobile wallets only work on a national level. But solving these issues and creating a single, unified modern EU payment system is the goal of the European Payments Initiative (EPI). With support from the European Central Bank (ECB) and major EU financial institutions, the project expects to launch by 2022.
The EPI looks to solve technological, regulatory and marketplace issues that complicate transactions for European merchants and consumers. Rapidly developing payment technology contributes to uneven adoption rates and incompatibilities. The complexities of intricate payment chains and all the varying rules that national regulators put upon different industry segments make cross-border cohesion difficult. And incumbents that already have solutions and market share are not inclined to reduce reliance on intermediaries themselves.
Mobile wallets, P2P payments and more
Once upon a time, payments meant “will that be cash or charge?” Now, that same question includes numerous payment options, including cash, credit, debit, crypto, PayPal, Google Pay, Apple Pay, or bank transfer, among others. Consumers have varying preferences on using payment methods, as do merchants, and the resulting payment networks have numerous players in all the various layers of payment flows.
Technology is undoubtedly improving the payment experience and systems, enabling online and mobile transactions, for example. However, all these options and resulting integrations add complexity and confusion to the entire EU payments system.
Fintechs and traditional technology companies like Apple and Google create new payment technologies and try to disrupt the market. Partnerships and payment networks change and adapt systems in a continually evolving race to add convenience, speed transactions, lower costs and reduce fraud. All the while, legacy payment channels need ongoing support.
The EPI must consider all these variables and ensure that the technical frameworks which emerge are secure, scalable and robust. It requires buy-in from industry participants, merchants, consumers and regulators. It also must be future-proofed, enabling the future of payments for the whole EU.
Working within payment regulations
Fortunately, there already exist Pan-European regulations regarding payments, most notably Payment Services Directive 2 (PSD2). PSD2 is a wide-ranging directive that helps harmonize and integrate payment regulations across the EU and opens up payment information to create a more competitive environment.
While parts of PSD2 have been in effect since 2018, the Strong Customer Authentication (SCA) element has only come into full effect this year. SCA establishes online payment authentication requirements designed to reduce fraud and enable better security. Authentication is an extra step in the payments workflow that better determines if the person is who they say they are. This additional requirement has been pushed back multiple times due to the practical limitations of implementing such a significant change.
However, now that authentication is in place, the full potential of PSD2 and its ability to open up the EU payment space to innovations and capabilities has arrived. The EPI can build upon all the regulatory clarity and requirements to build a new EU payments future.
A new payments playbook?
Perhaps the most significant business opportunity is at the point of disruption; new possibilities open up, and there is no clear winner. While PSD2 has been in the works for years, it is now a fundamental requirement and is the foundation of whatever will happen in EU payments.
The pace of innovation will likely accelerate as new services take advantage of payment technologies such as API-based integrations, mobile applications, cloud services, cryptocurrency tokens and blockchain systems.
Consider one possible new service, request to pay, where a payee submits payment requests electronically and the payor approves payments. The payor is in control, can quickly see invoice details and can pay with a click or set payment rules. The actual payment is instant. As stated by EBA Clearing, “Request to Pay solutions can increase certainty, transparency and convenience of payment processes, for instance by speeding up the end-to-end process and easing reconciliation.”
EPI will use SEPA Instant Credit Transfer, which is an instant payment model. The ability to deliver new payment models, such as instant payments, is one of its most significant advantages. As the ECB states, the EPI “seeks to replace national schemes for card, online and mobile payments with a unified card and digital wallet that can be used across Europe, thereby doing away with the existing fragmentation. As it is based on the SEPA instant credit transfer scheme, it can immediately capitalize on powerful and sophisticated existing infrastructures.”
In whichever way the EPI develops, the EU payments industry is in a critical transitionary stage. The unleashing of new financial services and emerging opportunities for Pan-European offerings is bound to create a significantly different competitive landscape. Payment companies worldwide will be watching what advances these new regulations and technologies bring about in Europe.